The global cannabis industry is enjoying explosive growth. Hemp-derived cannabidiol (CBD) alone could become a $22 billion market by 2022, according to Brightfield Group, while the marijuana market could one day reach $166 billion in annual sales, according to Bank of America.
Across the world, demand is surging for products derived from the cannabis plant. People are increasingly using marijuana and CBD to treat a variety of ailments. In turn, cannabis has the potential to disrupt massive industries such as tobacco, alcohol, and pharmaceuticals -- creating fortunes for cannabis investors along the way.
If you're searching for a way to profit from this megatrend, read on to learn more about three businesses that are particularly well positioned to cash in on the cannabis boom in the years ahead.
The industry leader
When it comes to marijuana production, scale matters. The larger producers can spread their costs over a bigger revenue base, thereby generating higher profit margins. Larger growers can also more easily sign lucrative long-term supply deals with wholesalers and governments. This can lock in sizable revenue streams and provide these producers with more cash to expand their operations.
Out of all the publicly traded marijuana producers, Aurora Cannabis (NYSE: ACB) has the most peak production potential by far. Boosted by its acquisitions of MedReleaf and CanniMed, Aurora is on track to produce more than 625,000 kilograms of cannabis annually by 2020. Moreover, my colleague Sean Williams believes Aurora could potentially produce as much as 1 million kilograms should it choose to develop more of its land assets in the coming years.
Aurora's industry-leading scale should continue to provide it with powerful competitive advantages over its smaller rivals. It's also helping the Canadian cannabis producer increase its revenue at a torrid pace. Aurora's gross revenue soared 367% year over year to 75.2 million Canadian dollars in its most recent quarter, fueled by a 1,193% increase in cannabis kilograms produced (15,590) and a 577% increase in kilograms sold (9,160).
Aurora's growth investments are, however, weighing on its profitability. The company produced a CA$158 million net loss in its fiscal third quarter, up from a loss of CA$19 million in the third quarter of 2018. Yet management expects higher production volumes and lower per-unit costs to help Aurora generate positive earnings before interest, taxes, depreciation, and amortization (EBITDA) beginning in the fourth quarter.
Improving economies of scale should allow Aurora to reach sustained profitability in the years ahead. Investors may want to buy ahead of that -- before the market realizes just how profitable Aurora Cannabis can ultimately become.
The real estate play
Innovative Industrial Properties (NYSE: IIPR) offers investors an opportunity to profit from the lucrative combination of real estate and marijuana. The real estate investment trust acquires regulated facilities used to grow medical marijuana and leases them to state-licensed producers.
IIP owns 20 properties in 11 U.S. states comprising more than 1.3 million rentable square feet. These properties are highly profitable, with average yields on invested capital of more than 15%. They also produce strong, recurring cash flow; the properties' average lease length is nearly 15 years. In turn, IIP passes this cash flow on to investors via a rapidly growing dividend, which currently yields 2.1%.
Seventeen U.S. states have yet to legalize medical marijuana, and the industry remains in its nascent stages in the states that have. Thus, IIP has long runways for growth still ahead. Investors have begun to catch on to the company's tremendous expansion potential, and shares have surged 150% over the past year.
Yet Innovative Industrial Properties' current $837 million market capitalization still likely belies its long-term growth prospects. Moreover, shares are priced at less than 27 times analysts' forward earnings estimates -- a bargain price for a company that's growing revenue, profits, and cash flow in triple-digit percentages.
The CBD play
Charlotte's Web Holdings (NASDAQOTH: CWBHF) is the global leader in hemp-based cannabidiol. Its products -- which include CBD oils, capsules, creams, and pet products -- can be found in more than 6,000 retail locations, up from less than 3,700 stores at the end of 2018. It also has a rapidly growing e-commerce business, which comprises about 50% of its sales.
Charlotte's Web should continue to expand its retail presence in the coming months. The company recently struck deals with four national grocery and drugstore chains. While these chains are currently only offering Charlotte's Web's products in select markets, they are expected to roll out the CBD maker's goods to more of their stores in the year ahead. "We view these national accounts as big wins for Charlotte's Web," CEO Hess Moallem said in the company's preliminary first-quarter earnings release. "Though they are entering the category slowly, these accounts are expected to transition from pilot sites to broader rollouts with expanded offerings in the future."
Charlotte's Web is ramping up its production to meet the surging demand for hemp-based products. It's planting twice as many acres of hemp as it did in 2018, which should allow it to produce more than 1.3 million pounds of hemp in 2019.
This, in turn, should fuel hefty gains in revenue. The midpoint of Charlotte's Web's guidance calls for revenue to more than double in 2019, to $145 million. And analysts expect the company's sales to surge another 120%, to $323.5 million, in 2020.
Better still, Charlotte's Web -- unlike many cannabis companies -- is already profitable. In 2018, the company generated adjusted net income -- excluding IPO costs -- of $13.1 million, or $0.16 per share, representing year-over-year growth of 76%. Analysts expect Charlotte's Web's earnings per share to rise more than 100% in each of the next two years, to $0.33 and $0.75 in 2019 and 2020, respectively.
Despite these impressive growth prospects, Charlotte's Web's stock currently trades for less than 21 times forward earnings estimates. That's an excellent price for this rapidly growing market leader. As such, investors seeking a way to profit from the CBD boom may want to consider buying some Charlotte's Web Holdings shares today.
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